Can private markets replace academic scientific research?

In which I argue that universities do a unique type of research that cannot easily be replaced by markets and give concrete examples as well as empirical evidence

Academia has not really had a good last few months, to say the least. In October, the Nobel Prize in Medicine awarded to Katalin Kariko highlighted the harsh realities she endured in academia. Throughout her career, she faced continuous rejections for grants, personal humiliations, and even threats of expulsion. Her office at Penn University was unceremoniously cleared out without notice¹. Her persistence in the face of so much rejection comes across as no less than heroic. The unjust treatment of someone like Kariko contrasts sharply with how academics much more lacking in integrity have been richly rewarded. Just this year, superstar behavioural economists Dan Ariely and Francisca Gino have been accused of fabricating data; Biologist Marc Tassier-Lavigne, the President of Stanford, resigned over serious issues with his research. More recently, the President of Harvard, Claudine Gay, has been embroiled in a plagiarism scandal.

It’s easy to see these signs and take the “Burn it all Down” position. I’ve seen numerous claims that we can just abandon academia: the private market can take care of everything, including funding research. This type of narrative is particularly popular among a certain type of Silicon Valley thinker (think Balaji Srinivasan). I sympathise with their frustration. To disregard this as just a crazy “tech bro” mentality would be a mistake (one that a lot of established academics will make nevertheless). Academia is losing prestige across the board in the general population. Anecdotally, some of the smartest and hardest working Biology PhD students I know are not planning to stay in this system.

But while I agree academia has a serious problem, I do not think markets can just take over most of the scientific research that is currently being done in it. Or at least, if they did, it would come at great expense to our innovation ecosystem. This might sound weird coming from me: I’m usually the in-house capitalist! But having worked for early stage biotech VCs, biotech IP law firms and in Biology academia across several fields, I can pretty confidently say that the kind of research that happens here is not really the kind doable in a profit-driven institution. And long-term, abandoning the kind of “blue-sky” curiosity driven research that’s typical of academia would have negative impacts on private pharma/biotech companies. I’ve been harping on this point for a long time, but this month my intuitions gained more formal empirical support. This came in the form of an Economics paper from Arnaud Dyevre. TLDR, his work shows that state funded research has particularities that make it non easily replaceable with private funded research. In particular, public funded research tends to be more fundamental and “ahead of its time”. Arnaud also shows that state-funded research has more positive spillovers, especially on smaller firms.

Public vs private funded research

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The paper in question makes use of scientific patents assigned either to private or public entities by the USPTO over seven decades (1950-2020).

The first important finding is that research funded by public sources is more foundational and has a higher potential to pioneer new areas. The key methodological question here is: “how do you measure if a patent is more likely to open a new field?”. This is addressed by utilizing the U.S. Patent and Trademark Office's (USPTO) system of categorizing patents into specific technological areas. Groundbreaking innovations often don't align neatly with established categories. However, when such an innovation is influential enough to establish a new field, the USPTO must reclassify earlier patents into this newly formed category. Therefore, the researcher proposes a metric focusing on the duration between a patent's filing date and the point at which it is assigned to a new patent category as a metric of “disruptiveness”. For example, see concrete example from the paper below:

For instance, a patent filed in 1996 and protecting a technology that is relevant for the development of self-driving cars would be re-classified from, say, ”Data processing: Vehicles, Navigation, and Relative location” (class 701) to ”Data processing: Artificial Intelligence” (class 708) in 1998, when the latter is created. This patent would have contributed to open a new technological field two years before this field is recognized by the USPTO.

After controlling for relevant variables (e.g. R&D effort), the author finds that “public R&D patents are typically 1.25 more years ahead than private patents (+19%)”. This might not sound like much, but it’s actually pretty big for science fields. For example, the 2020 Nobel Prize in Medicine went to Charpentier and Doudna vs Feng Zhang due to them publishing results 6 months earlier.

It doesn’t take long to understand why that might be the case: science is inherently serendipitous; it’s very hard to predict what practical results might come out of a scientific finding. It also takes a long time for any given finding to end up having practical implications: sometimes in the order of decades. Private markets are very good at one thing: optimising when a given outcome that generates profit is wanted. But when it comes to foundational research, that might be profitable in decades, there’s no clear optimisation pathway. In biotech, the private sector tends to add value only after the foundational discoveries have already been made in academia.

In fact, I think the paper UNDERestimates how much more “ahead of its time” public research is because it focuses entirely on patents. But research going on in universities is often decades, not years “ahead of its time”. This is hard to measure using the methodology of this paper, because this type of research does not get patented so it would be completely missed from the analysis.

Now, moving on to the next finding: public research generates more positive spillovers, especially to small companies. The author interprets these findings in 2 possible ways. One interpretation is that smaller companies might not have the necessary resources or motivation to engage in fundamental research, unlike large corporations known for their robust basic research labs. Another perspective is that the rise of university spinoffs, particularly since the 1980 Bayh-Dole Act which encouraged university patenting and licensing, has enabled academic researchers to commercialise their discoveries. I would put my money on the second explanation: anyone with experience in the biotech start-up field knows that big pharma companies outsources a lot of the innovative discovery to small companies, which are born directly out of academic research².

To illustrate my point re: the importance of academic spin-outs, I am going to zoom in on the biotech sector: this recent analysis of the origins of new therapeutics reveals that at least for the development of biologics³, large pharma companies rely primarily on external innovation. The majority (63%) of the 48 biologics approved for the top biopharma companies had their origin in newer biotech companies (founded after 1976) and only 13 (27%) were invented in pharma companies. Again, this analysis underestimates the importance of start-ups, since “development of a new biologic” is pretty late-stage in the drug discovery process. Pharma acquires a lot of companies that do not directly develop new therapeutics, but work on tech at an earlier stage.

Origins of drugs developed by the top 20 biopharma companies

I always say it’s good to “feel the data”, so I am going to illustrate the points here with a concrete example of a successful biological technology and how it originated from basic research.

The story of CRISPR/Cas9

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Recently, CRISPR/Cas9 garnered significant attention following the approval of Cesgevy, the first gene therapy for sickle cell disease and beta-thalassemia. These two inherited conditions - caused by mutations that impair haemoglobin production or function in red blood cells - lead to serious, lifelong health challenges. The groundbreaking gene editing technology earned Jennifer Doudna and Emmanuelle Charpentier the Nobel Prize in Chemistry in 2020. It achieved this recognition only eight years after their seminal paper on CRISPR/Cas9 was published in Science, marking one of the shortest intervals between a scientific discovery and a Nobel Prize awarded for it.

CRISPR/Cas9, originally a natural defense mechanism in bacteria, has been repurposed for gene editing in various organisms. In this system, bacteria use CRISPR sequences to store fragments of viral DNA, allowing them to recognize and combat future attacks. Scientists have harnessed this mechanism by designing a custom RNA sequence to guide the Cas9 enzyme, which then precisely cuts DNA at a specific site. This innovation enables researchers to accurately edit genes by removing, adding, or altering DNA sequence

However, the origins of the now famous gene editing tool are less glamorous, tracing back to Spanish researcher Francisco Mojica's pioneering discoveries in the 1990s. Mojica identified distinctive DNA sequences in bacteria, which he termed CRISPR, revealing their natural function as a bacterial immune system capable of storing and precisely targeting specific genetic information. This natural mechanism became the inspiration for the development of CRISPR/Cas9 technology. At the time, this was very fundamental, curiosity-driven research: it wasn’t at all obvious that it would have such important applications. No private company would have funded him.

It was only in 2012 that Doudna and Charpentier published their famous Science paper, showing that CRISPR/Cas9 could be engineered to edit specific gene sequences in a rational fashion. Despite being much more directly connected to a potential practical application, this discovery (as well as everything in between Mojica and the 2012 paper) happened in academia, too. 

Doudna and Charpentier - winners of the 2020 Chemistry Nobel Prize; they had both been fundamental researchers prior to this

“Curiosity-driven research" significantly influenced the scientific upbringing of the two inventors, Jennifer Doudna and Emmanuelle Charpentier. Prior to CRISPR, Doudna was primarily focused on RNA structure, having studied under Nobel Laureate Jack Szostak⁴. She briefly ventured into industry, taking the role of discovery lead for Genentech mid-career. This lasted only 2 months: she soon returned to academia, seeking greater freedom for exploration. This eventually led to the CRISPR breakthrough: It was after her return to academia that she made the Nobel-prize winning discovery. Charpentier had also been a fundamental biologist: her focus was researching bacterial immune systems. In fact, a crucial piece of the puzzle that led to their 2012 Science paper came from earlier work in Charpentier's lab, all started as a blue-sky research project. After winning the Nobel Prize, Charpentier chose to leave behind the CRISPR field and dedicate herself to her initial passion: she is now leading an Institute in the field of Microbiology.

The 2011 paper from the Charpentier lab that set the 2 ahead of their competirors

After the 2012 proof of concept, the private market did what it does best: optimise for an outcome that might generate profit. There are now several CRISPR based therapeutic companies in various stages of development. Most of these are start-ups founded out of academic labs. For example, Jennifer Doudna’s lab has spun out several companies, including Caribou Biosciences, Intellia Therapeutics, Mammoth Biosciences and Scribe Therapeutics. Most of them were founded just prior to or right after the big CRISPR publications, thus riding on all the academic blue-sky research. Large biomedical equipment suppliers made CRISPR available to scientists widely. Researchers can now buy CRISPR kits from private companies, which means that gene editing has quickly become commonplace in Biology! Without the forces of the private market this democratisation wouldn’t have happened.

The story of CRISPR, while abnormally successful, is still pretty representative of the cycle of innovation: decades of fundamental research followed by investment when the possibility of profit it being detected by investors. Abandoning academia would mean disrupting this cycle from its very roots. When I say “academia”, it does not mean we have to keep the exact same entities: what is important is that we continue funding research that is not geared towards earning profit. This can mean founding entirely new research institutions: see for example FROs or initiatives like ARIA UK. However, since network effects are important, these will be somewhat dependent on the existing academic ecosystem. After all, this is still where the best researchers are being trained.

1. This episode is described in her book "Breaking Through”

2. For example, this is an illustration of the scientific discovery process from a top VC firm in biotech: RA Capital. You can see that Venture Capital investment comes after the initial stage (building of the Knowledge base)

3. Biologics are complex, large molecule drugs derived from living organisms, like proteins and antibodies, used to treat diseases by targeting specific cellular processes. In contrast, small molecules are simpler, smaller chemical compounds, often synthesized chemically, and work by entering cells to alter their function, commonly used in a wide range of medications like pain relievers and antihistamines.

4. Jack is a very cool guy himself, and is now researching “the chemical and physical processes that facilitated the transition from chemical evolution to biological evolution on the early earth” - very fundamental question!